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Monday, April 25, 2011

Helping the Poor? Economics Vs. Emotions

Despite the belief shared by many that economists are heartless, helping the poor has been at the center of economics from the very beginning. Really, at its core, the discipline works to understand and explain the reasons for wealth gaps between countries and between individuals. Adam Smith even named his book An Inquiry into the Nature and Causes of the Wealth of Nations, in order to provide a sort of an (institutional) recipe for achieving wealth and to show why some countries are successful and others are not. This is no different today, as Nobel Prize winning economist Robert Lucas has said, “Once you start thinking about economic growth, it is hard to think about anything else.” In other words, the main motivation of economics is to explain the reasons that make the whole world better off.

This leads to the question: why the misconception that economists are heartless? I believe the answer has to do with emotions. The suffering of human beings, no matter who they are, is no laughing matter. This is just another reason that solutions need to be looked at calmly, coolly, and objectively. We need to find the correct solutions and this requires checking your emotions at the door.

Humanitarians seem to become too attached to their stance at an emotional level, even seeming to suffer from a mystical belief in the moral superiority of their solutions, no matter what the outcome. In fact, this has led to the enactment of countless terrible public policies. Economics, on the other hand, is a science. The economist’s job is to take the end as given and then explain the best ways to achieve that end.

For example the issue of sweatshops is one of the most emotional issues, which enrages many Americans today. People see struggling women and children “forced” to work in terrible working conditions and call: “Sweatshops must be Stopped!” “Ban them!” “We must boycott!” The question is: will closing sweatshops stop “exploitation” and get people out of poverty?

Many economists argue that these solutions would have detrimental effects on the poor.

Today’s document is the Cliché of Socialism Number 40 by Paul L. Poirot, in which he correctly argues why the labor laws put in place to prevent child labor and improve working conditions are not responsible for ending sweatshops in the United States. That kind of labor was necessary at one time, but as wealth was accumulated, this type of labor became undesired and went away. In fact, laws banning sweatshops, if put in place at that time, would have done more harm than good and would not have achieved the desired ends. Paul Poirot is not alone; many economists point that there are some positive benefits of sweatshops for the poor. One of these economists is Professor Benjamin Powell.

“Positive benefits! Outrageous, would you want to work in a sweatshop?” Of course not, none of us would, if given the right choice, but sweatshops are not the problem, poverty is. Poverty creates a situation where sweatshops might just be the best option given all other alternatives. When we step back and look at the problem objectively this becomes clear. First, there is no magic solution to quickly eliminate poverty but with the right institutions in place individuals will have incentives to create and foster economic growth. Second, opportunity costs matter. If you take away sweatshops, what will these workers do? Well, many will be “forced” to work in much worse and less paying jobs, some (perhaps even children) may resort to prostitution, others may simply starve to death. If sweatshops create slavery it would be another matter, but the fact is this: given all opportunities and constraints these individuals want to work in the sweatshops. As workers become wealthier competitive forces improve working conditions, increase wages, create more leisure, etc. So, they can enjoy the same benefits, us people living in wealthy countries enjoy today. There is no quick path to this point and wealth must be built up.

Once humanitarians acknowledge this fact, the right response should be to encourage trade with countries where sweatshops exist. Buy sweatshop goods, higher demand for their services means the quicker wealth accumulation by these workers, which inevitably will lead to disappearance of sweatshops. Restricting trade with countries where sweatshops still exist keeps these individuals poor, which is the opposite of what we want.

The capitalist system has lifted mankind out of mass poverty. It is this system that in the last century and in the last generation, has progressively changed the face of the world, and has provided the masses of mankind with amenities that even kings did not posses or imagine a few generations ago. - Henry Hazlitt

The American people will never knowingly adopt socialism. But, under the name of “liberalism”, they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened..I no longer need to run as a Presidential Candidate for the Socialist Party. The Democratic Party has adopted our platform. - Norman Thomas

So long as the people do not care to exercise their freedom, those who wish to tyrannize will do so; for tyrants are active and ardent, and will devote themselves in the name of any number of gods, religious and otherwise, to put shackles upon sleeping men. - Voltaire, 1764